Where Does The Money Go? Understanding Fica, Social Security, And Medicare
Hands up if you’ve wondered about where your money goes after your gross salary? If your hand is up, you’re not alone. Most people want to know exactly where their money goes when they see the difference between their net pay and their gross pay. What happens with that significant amount of extra money? Keep reading to find out more about FICA, social security, and Medicare.
What Is FICA?
FICA stands for the Federal Insurance Contributions Act. During 1930, the act was introduced to cover Social Security. Medicare was then added at a later stage. Both employers and employees pay FICA and these days, the tax is divided into Medicare tax and Social Security tax. The tax rates for employees in 2019 are 1.45% for Medicare and 6.2% for Social Security.
In addition, highly paid employees are charged a 0.9% Medicare surtax. What is FICA withholding, you ask? FICA withholding refers to the duty of employees to withhold FICA taxes from employees’ wages. They also have to pay their own employer FICA taxes and report both of these to the Internal Revenue Service (IRS).
It’s essential that business owners remember the importance of withholding the correct amount of FICA from employees while also paying their own portion of the tax. Failure to do so will result in serious consequences. FICA taxes are the most critical taxes to stay on top of, which is why it’s critical to do your research and stay updated on the topic.
What Is Medicare Tax?
Medicare tax supports the Medicare program. This program ensures all Americans older than 65 years have access to federal health insurance. Employees and employers must pay their Medicare tax. In addition, self-employed people pay both self-employment tax, which means they pay both the employee and employer portions of the Medicare tax.
If you’re wondering about the Medicare withholding rates in 2019, you’ve come to the right place. This year, the rate for Medicare tax is set at 1.45% of an employee’s gross earnings. The employer portion matches that rate at 1.45% too. The only difference is that, as with FICA, the employee’s portion is deducted from their wages while the employer pays their share directly.
Some employees have to pay an Additional Medicare Tax at 0.9% This tax applies to employees who make more than a set threshold amount each calendar year.
What Is Social Security Tax?
Social Security and Medicare tax are similar in that they both support millions of retired Americans every year. The Social Security tax pays for federal disability and retirement benefits that support a huge portion of the American population. Employees and employers must both pay Social Security tax. Along with this, as with Medicare, self-employed people pay both employer and employee portions.
This year, the rate for Social Security tax is 6.2% of an employee’s gross earnings below $132,900. A matching 6.2% is required by the employer. Again, the employee’s portion is deducted from their wages while the employer pays its share directly. This dollar limit is adjusted annually for inflation. If your employees’ wages exceed $132,900, you should no longer withhold social security taxes from their pay.
In addition, you also don’t have to pay any employment taxes on wages above that amount.
How To Report FICA Taxes
Using IRS Form 941, businesses must report FICA taxes on a quarterly basis. This form contains a range of information, including the following. The amounts you’ve withheld from each employee’s paycheck for income taxes, business information details, and the number of employees in your company.
In addition, this form is also used to report the employer’s portion of Medicare FICA taxes and Social Security taxes. Keep in mind that Form 941 is due on the last day of the month following the end of each quarter. For example, the form would be due to April 30 for the period covering January 1 to March 31).
How To Pay FICA Taxes
The IRS has an Electronic Federal Tax Payment System, which small businesses must use to deposit FICA taxes. This is the case unless your FICA tax liability is less than $2,500 a quarter. You won’t just pay your taxes once a year to the IRS, as they operate on a pay-as-you-go system for employment taxes.
What this means as an employer is that you’ll have to periodically deposit both your employer’s taxes and the taxes you’ve withheld from your employee’s paychecks. Keep in mind that FICA taxes are calculated based on an individual’s gross annual wages. This takes into account any tips, bonuses, commissions, employee reimbursements, sick pay, overtime pay, and premiums on some types of insurance.
It’s critical to do your research and seek help if you need it. If you don’t take note of the wage caps and thresholds, you won’t be able to correctly calculate your FICA tax charges. This means you will not be withholding the right amounts from your employees.
The Next Steps
Remember that if you don’t follow Social Security, Medicare or FICA instructions carefully, you may deduct too much Social Security tax from an employee. This could be the case if you kept on deducting above the Social Security maximum by mistake. Whatever the reason for the error, it’s critical that the money is refunded to the employee.
This kind of scenario is avoidable, especially if you streamline your tax and payroll systems. We offer advice from professional accountants who ensure accurate calculations and no extra hidden fees. Try out our paystubs maker and see for yourself!
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